Preferrence - Friendly Creditor - Collusion?

[friendly]

Hello All,

Question for you... but let me firts summarize the salient points...

1. Debtor has a note payable to bank for $400k dating back several years.
2. Note is secured by debtor residence (primary) in 2nd TD position
3. Home is underwater. At market value the creditor might collect $100k in foreclosure.
4. Debtor enters Ch 7.
5. Two months in, the Debtor and Creditor agree to a compromise. Debtor to pay creditor $50k in exchange for release of lien.
6. Creditor is worried that the agreement will be voided, and creditor and debtor agree to postpone until after discharge.
7. $40k is held by the non-filing spouse.
8. Discharge.
9. Compromise is subsequently consumated.

Question - Is this legal? Ethical? Is this a case of concealment, or preferrence, fraud, or collusion?

Your comments appreciated.

Regards.

[despritfreya]

Where did the 50K come from? California is a community property state. For the most part, non-filing spouse's assets (acquired during marriage and existing on the day of the filing) are property of the estate.

In direct response, if settling and a release of the lien would create equity over what is owed to the 1st, a debtor might not want to settle a 2nd until the property has been abandoned by the Trustee. The entry of a Discharge IS NOT an abandonment. In most cases the abandonment happens when the case is closed. In your scenario, a release of the lien prior to the abandonment would create at least $100k in equity. Is this equity above or below the homestead amount? Did the debtor even claim a homestead on Schedule C.

As to the ethics. . . nothing unethical about two parties settling a debt.

Des.

[justbroke]

Perfectly legal. The question is really about preferences. There is no preference when you pay a secured creditor! Some may say that the fact that you wanted to do this prior to discharge, may be questionable. The only real question is where did the funds come from. Hopefully, they were exempt funds.

Also, there is NOTHING in the bankruptcy code which prohibits a debtor from even paying an unsecured creditor after discharge!

[btbeme]

Whatever you do after discharge is your business. Unless it can be proven that you were intentionally fraudulent, which is a high legal bar to jump over. That being said, a $500 payment would be viewed under a very different light than a $50,000 payment. I can understand your concern.

Paying a secured debt is fine; though it might suggest that you could afford a Ch 13 if done early in the process. Certainly it would trigger some very in-depth questions at to where the $50k in the coffee can was buried.

Sounds like you have been holding your breath for a long time. While post-discharge file audits are about 1/100 and are typically limited to info that can easily be secured online or by request (such as a tax refund), I would not completely exhale. Not just yet. Des nailed it in his first 6 words. A foggy area, to be sure.